Shares Meaning and Types of Shares
Shares Meaning – “A fraction part of the capital of the company which forms the basis of ownership and interest of a subscriber in the company”.
A share is a small part of the total capital. When the owner’s capital divides into equal parts, then, each part is known as a share. A person who contributes for a share is called as a shareholder.
Types of Shares
In order to understand the shares meaning in in-depth, let’s discuss the concept of shares in detail. Shares can be broadly divided into equity shares and preference shares.
Equity shares are those which enjoy dividend and right to participate in the management. They are the owners and real risk bearers of the company. According to Companies Act 1956, shares refers to “Shares which are not preference shares are equity shares, or, ordinary shares”.
Equity shareholders are the real owners of the company and, therefore, they are eligible to share the profits of the company. In return of subscribing equity shares, shareholders gets dividend. At the time of winding of company, equity shareholders can claim on the assets of the company at the last.
Advantages of Equity Shares:
- The company has no immediate liability to pay it.
- No fixed dividend obligation.
- Increases creditworthiness of business, ceteris paribus.
- No charge created on assets of the business.
- Shareholders control the company.
- Limited liability of the investors.
- High dividends.
- No collateral security needed.
- Increases firm credibility.
Disadvantages of Equity Shares:
- Equity dividend not tax- deductible.
- High cost of equity issue.
- Gradual dilution of shareholder’s control over business.
- Manipulation by a few shareholders.
- Dividend at the discretion of the Directors.
- Very risky investment.
- Residual claim on investments.
Shares which enjoy preference with respect to payment of dividend and capital are preference shares. They get dividend before equity holders. They get back their capital before equity holders in the event of winding up of the company. The owners of these shares have a preference for dividend and first claim for return of capital at the time of winding up of the company. However, the dividend remains constant.
Cumulative Preference Shares
Such shareholders have a right to claim the dividend. If company does not provides dividend to them, then such dividend is accumulated. Hence such types of shares are known as Cumulative Preference shares.
Non- Cumulative Preference Shares
They are exactly opposite to cumulative preference shares. Their right to get dividend lapses if, they are not paid dividend and it does not get accumulated. Thus, their right to claim dividend for the past years will lapse and will not be accumulated.
Participating Preference Shares
Such shareholders have a right to participate in the excess profits of the company, in addition to their usual dividend. Thus, if, there are excess profits and huge dividends, are declared in the equity shares, the holders of these all shares get a second round of dividend along with equity shareholders; after a dividend at a certain rate has been paid to equity shareholders.
Non- Participating Preference Shares
Such shareholders do not have any right to share excess profits. They get steady income in the form of dividend which remain constant throughout the course of holding the shares.
Convertible Preference Shares
Shares which are convertible into equity shares on the option of the shareholders.
Redeemable Preference Shares
Shares which are redeemable after a certain period of time.
Non- Redeemable Preference Shares
Such shares are not paid in cash during the life of the company.
Merits of Preference Shares
- Fixed dividend.
- First claim on company assets.
- Cost of capital is low.
- No dilution over control.
- There is no dividend obligation.
- No redemption liability.
Demerits of Preference Shares:
- Not a very high dividend rate.
- No voting rights.
- Dividends paid are not tax- deductible.
- Non payment of dividend affects firm.